The Financial Services Commission has unveiled a comprehensive plan to reform regulations on corporate treasury stocks. This is a follow-up measure to the recent Commercial Act amendment, which mandates that companies cancel their newly acquired treasury shares within one year.
The key objective is to break the long-standing practice of companies using treasury shares not for shareholder returns, but as a tool to defend management rights or increase control. By making 'buyback and cancellation' the standard, the policy aims to directly tackle the 'Korea Discount,' the chronic undervaluation of Korean stocks.
So, why is this happening now? There are a few clear reasons. First, the legal groundwork was laid with the amendment to the Commercial Act. The government is now providing the detailed enforcement rules to make the law effective. Second, there were high-profile cases, like KCC's issuance of exchangeable bonds (EBs) backed by treasury shares in 2025, which led to a sharp stock price drop and sparked shareholder backlash. This highlighted how such loopholes could harm investor value, creating strong justification for regulatory action. Third, this entire initiative is a crucial part of the government's broader 'Corporate Value-up Program' launched in 2024, which seeks to improve corporate governance and shareholder returns across the board.
The new rules are quite specific. They require all listed companies to disclose their treasury stock holdings, purpose, and future plans twice a year. The regulations also tighten the rules for shares held in trust, preventing companies from indefinitely delaying cancellation. Most importantly, they effectively block the practice of issuing EBs using treasury stock as collateral, closing a major loophole.
Ultimately, these changes are designed to shift the corporate mindset from simply acquiring treasury shares to permanently retiring them through cancellation. This ensures that buybacks translate into a real increase in value for all shareholders by reducing the number of outstanding shares, which should, in theory, boost earnings per share.
- Treasury Stock: Shares that a company buys back from the open market. Also known as self-acquired stock.
- Exchangeable Bond (EB): A type of bond that can be exchanged for shares of a different company (often a subsidiary) held by the issuer. In this context, it refers to bonds exchangeable for the issuer's own treasury shares, which was used as a way to sell them without calling it a sale.
- Korea Discount: A term referring to the tendency for South Korean companies to have lower market valuations compared to their global peers, often attributed to issues like weak corporate governance, low dividend payouts, and geopolitical risks.